Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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When you ask the wrong question, you get the wrong answer. Congress and the President are asking, “How should we reduce the federal deficit?” The correct question is, “Should we reduce the federal deficit?” And the answer is “No.”
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Sometimes, something is so simple it can be hard to understand, as though “It just couldn’t be that easy.” This is one of those times.

The media don’t understand it. The columnists don’t understand it. The Tea Party, the Republicans, the Democrats and the debt hawks don’t understand it. For sure, President Obama doesn’t understand it. The old-line economics professors do understand it, but they’re afraid to admit it, because it makes them look like boobs for not telling you, all these years.

It is the single most important equation in economics. It’s so simple as to be laughable, yet it will amaze you (unless you are among the one-in-ten-thousand who already understands it). And once you understand it, you will look at the politicians in wonderment at their incredible ignorance.

This means, if the federal deficit is reduced $1, our combined savings will be reduced by exactly $1 — not $.99; not $1.01 — exactly $1.00.

Today, the politicians in Washington are talking about a $4 trillion (!) deficit reduction. That means our savings will be reduced by $4 trillion. There are about 310 million people in America. A deficit reduction of $4 trillion will reduce the savings of each man, woman and child in America by an average of $12,900.

That’s $12,900 out of your pocket, another $12,900 out of the pockets of your spouse, each of your children and each of your grandchildren. A four-person family will lose $51,600 in savings. If both your parents are alive, they’ll lose another $25,800 in savings.

Why do the politicians want to reduce your savings? Sheer ignorance of Monetary Sovereignty. They think “deficit” is a bad word and want to eliminate it. But a federal deficit is money in your pocket. And a federal surplus? That’s money taken out of your pocket.

How can this be? Again, simple. When federal spending exceeds federal taxes, it’s called a “deficit.” When the federal government spends, its payments for goods and services enter the economy. When you pay taxes, the money leaves the economy. So federal deficits add money to the economy, and where does that money go? Into your pocket as savings. Similarly, federal taxes take money out of your pocket.

for the laymen i would recommend forgetting all the disposable income consumption stuff and just expand on roger’s existing definition of private savings. Private savings is the savings of the private sector and the foreign sector. the foreign sector can be subdivided into the foreign private sector and the foreign public sector. I made a quick diagram to help visualize goo.gl/K9nbB thoughts?

The problem with economics is definitional inexactitude, i.e. people mean different things when using the same word. “Savings” usually means “net financial savings” which means:
Income – taxes – spending.

Some define net financial saving as:
Income – taxes – spending – investment.
But it always has been a mystery as to what is investment and what is saving.

What “net financial saving” does not include is anything physical, like land, a car, a house, a diamond, gold. Stocks are not saving, because they represent something physical — a company. Bonds are saving.

But none of the above is critical to the deficit/debt discussion. What is critical is that a reduction in federal deficit spending reduces savings, no matter how you define it.

To be more blunt about it, if the government budget deficit is reduced, one of two things has to happen – either YOUR (meaning the people of the USA) income has to reduce, or YOUR taxes have to increase. Nothing else is possible!

The question is whose income will be reduced — right now, the gun sights are on the most vulnerable in the society – the senior citizens on Social Security and Medicare/Medicaid, and the poor, homeless and unemployed, otherwise known as “entitlements.” Where will the taxes increase? On the bottom 80% of those who are employed — otherwise euphemistically known as “the Middle Class.”

I’ve seen you on Rodger’s blog for a while. You well know that what you’ve just said above (“YOUR income has to reduce, or YOU taxes have to increase”) has been addressed at length. What you are saying is absolute nonsense.

It is nothing but a logical restatement of the income identity that Rodger’s post is all about. Government deficit equals private savings to the penny. Deficit reduction can only come about by two actions – reduction in government spending, or increase in government revenue (taxation). Can it come any other way? If government spending reduces, private sector income is reduced by an equal amount. Taxation obviously reduces net income of the private sector by the amount taxed.

Since the government creates money by spending, and destroys money by taxation, a reduction in deficits means a reduction in the money reaching the private sector. And that means a reduction in income.

Would you care to read instead of having your hand held the whole way? Rodger has explained why that type of comment is nonsense probably once per week on average. Literally. It’s everywhere on this blog.

And when you’re done, go read Warren Mosler’s blog, because he says the same thing…repeatedly.

Look, you’ve obviously been periodically reviewing this blog for a while. You either have read what Rodger has said in other places in this blog and can’t understand it, or you’ve intentionally chosen to ignore it in favor of economic ignorance (I’m not trying to throw flaming arrows, here. A lack of knowledge is the dictionary definition of “ignorance.”). Either way, it is a waste of time for me,or anyone else to explain anything to you. You obviously either have no desire or ability to learn.

Why do you consider the very straight arithmetic of what I have laid out to be incorrect?

I am not asking about Rodger’s opinion, or Warren’s opinion, I asked you that question. I did not see Rodger repudiate my statement. Are you a mind reader, who can read Rodger’s mind or Warren’s mind? I do not see any contradiction in what I wrote and what Mitchell or Mosler have written.

Yes, I did. What I didn’t do was hold your hand. I have a life and, no disrespect, it doesn’t involve spoon feeding you. Go read the other entries on this blog.

“Why do you consider the very straight arithmetic of what I have laid out to be incorrect?”

Because, to be more specific, taxes function to regulate aggregate demand and not to raise revenue per se. This is an economic fact and, as such, not up for debate. If you do not understand this, you do not understand economics. Again, this has been said, on average, once a week, in some form or another, on Rodger’s and Warren’s blog (everyday on Warren’s actually).

“I am not asking about Rodger’s opinion, or Warren’s opinion…”

It’s not “opinion;” it’s fact. If you don’t believe me, or Rodger, or Warren, or James Galbraith, or Randall Wray, or Bill Mitchell, or many other economists, feel free to ask anyone at the Treasury if they transfer taxes collected to the Fed (they don’t) or anyone at the Fed if they use tax money (again, they don’t).

“I asked you that question. I did not see Rodger repudiate my statement.”

While I can’t claim to speak for Rodger, I suspect you didn’t get an answer due to the massive ignorance you’ve continued to show despite the fact that he, and others, have went over this point many times. At some point, it’s up to you to learn and, again, not up to others to constantly wipe your nose for you.

“Are you a mind reader who can read Rodger’s mind or Warren’s mind?”

No, I’m an English reader who can read their blogs. No offense, but you obviously have had a problem with this so far.

“I do not see any contradiction in what I wrote and what Mitchell or Mosler have written.”

You are very, very alone in that statement.

I said it before, and I’ll keep saying it until you get it: Go read this blog and Warren’s. The answer you want is as plain as day.

I think you misread my earlier posting. Please go back and re read it. I am on the same side as you are. The reason I asked you to answer my question was to find out if you had perchance misread my post. Note that I said that the REDUCING the DEFICIT is BAD. That is what each of the people you mention say.

Okay, to start, let’s take your comment on the whole. I’ve pasted it below in its entirety:

“To be more blunt about it, if the government budget deficit is reduced, one of two things has to happen – either YOUR (meaning the people of the USA) income has to reduce, or YOUR taxes have to increase. Nothing else is possible!

The question is whose income will be reduced — right now, the gun sights are on the most vulnerable in the society – the senior citizens on Social Security and Medicare/Medicaid, and the poor, homeless and unemployed, otherwise known as ‘entitlements.’ Where will the taxes increase? On the bottom 80% of those who are employed — otherwise euphemistically known as ‘the Middle Class.’

In the words of Orrin Hatch – The ‘Poor’ Should Do More To Shrink Debt, Not The Rich.”

Please reply by re-pasting the part where you actually unambiguously said deficit reduction was bad in this comment, and I will reply with my apology.

While you may say you implied it, I’d disagree (for reasons I will elaborate on below).

Now, let’s take your comment point by point….

“…if the government budget deficit is reduced, one of two things has to happen – either YOUR (meaning the people of the USA) income has to reduce, or YOUR taxes have to increase. Nothing else is possible!”

Again, this is not true. As far as income is concerned, it can stay the same if other people are merely laid off. Average income of those still working doesn’t change (it might even increase as lower skilled workers are more likely to get the axe).

And if you’re somehow trying to make your point by saying that the average income across the workforce will be reduced via said layoffs, then you’re not doing a good job making a point. All you have to say is that the coming recession caused by the deficit reduction will cause layoffs. Point made (and it’s less ambiguous).

Also (and this is the big one), taxes are effectively not for revenue purposes. Furthermore, I can see no current or future situation in this country where taxes will have to increase for any reason. These points have been belabored here for a while now (and this part of your comment is why I don’t buy that you understand what’s being said here). You sound no different than a debt hawk (which makes any implication you may now say you were going for thoroughly misunderstood). I have yet to hear Rodger or Warren say a tax increase was necessary.

“The question is whose income will be reduced — right now, the gun sights are on the most vulnerable in the society – the senior citizens on Social Security and Medicare/Medicaid, and the poor, homeless and unemployed, otherwise known as “entitlements.” Where will the taxes increase? On the bottom 80% of those who are employed — otherwise euphemistically known as “the Middle Class.”

Mostly a political discussion. Nothing to see here.

To be honest, the further I read into the comment, the more nonsensical it became. Taxes do not effectively fund spending. That one is settled. And the rest of your comment borders on the definitional inexactitude that Rodger is discussing. “YOUR income?” “YOUR taxes?” This is the epitome of trying to be exact, yet failing to do so.

The whole issue is about politics. Cutting or increasing government deficits is about politics. Economics and politics are intertwined with each other – else Rodger’s post is meaningless.

Taxation reduces money in circulation. This is an indisputable fact. No economist MMT or otherwise will dispute it.

MMT advocates say that since the government is the sole supplier of money, and is its creator, and that the cost of producing money is nominal, it does not need to tax in order to spend. In the MMT paradigm, the economy should be controlled by targeting unemployment and inflation. Inflation is to be controlled by taxation, and unemployment is controlled by government spending. Thus if the employment and inflation are at acceptable levels, whether the government runs a deficit or a surplus becomes irrelevant.

But government spending and taxation serve other purposes as well. These purposes are more generally political in nature. The nature of spending, and the nature of taxation determines the nature of goods and services produced by society, and also how the wealth is distributed.

Now, the deficit hawks want the deficit to be cut. In their view, this can be done by reducing government outlays, and/or increasing government revenues. What combination to employ is the current political soccer being played in DC — almost every politician seems to have bought into the deficit reduction is good paradigm.

Going down each of the two paths advocated by the deficit hawks leads me to the following conclusions.

1) If we reduce government spending, private sector income is directly reduced. This results in a reduction in income for everybody – even those that have no direct income from the government. The effect is more for some people, and less for other people, but everybody’s pocket book is impacted.

2) We increase tax revenues. This results in a reduction of the money in circulation, and this also reduces the income for everybody — whether or not you were directly taxed. Thus the effect of the taxation is felt by everybody — more for some and less for others.

To this logic, the deficit hawks say, we have to bite the bullet in the short term to avoid problems in the future — inflation, and even hyperinflation are mentioned. But there has been no sign of inflation. So that is a canard, and a bogeyman designed to scare people.

The other thing mentioned is that the government debt will have to be paid by are children and grand children. This comes from a deep misunderstanding on the part of the general public of what government debt is. In fact the fiction that the government “borrows” has to be done away with. This last point is made even more poignant by the circulation by these fear mongers of Pete Stark’s interview on you tube where Pete Stark talks of government debt being good.

I hope that this clarifies my point of view, and apologize if my thoughts were unclear to you before.

“The whole issue is about politics. Cutting or increasing government deficits is about politics. Economics and politics are intertwined with each other – else Rodger’s post is meaningless.”

I agree that the whole debt ceiling fight is about polotics, but that wasn’t what Rodger’s post, or comment you replied to, was about. It was about economics. He was talking about Federal Deficits = Private Savings. He wasn’t talking politics.

“Taxation reduces money in circulation. This is an indisputable fact. No economist MMT or otherwise will dispute it.

MMT advocates say that since the government is the sole supplier of money, and is its creator, and that the cost of producing money is nominal, it does not need to tax in order to spend. In the MMT paradigm, the economy should be controlled by targeting unemployment and inflation. Inflation is to be controlled by taxation, and unemployment is controlled by government spending. Thus if the employment and inflation are at acceptable levels, whether the government runs a deficit or a surplus becomes irrelevant.”

All well and good, but the overall theory is not being discussed.

“But government spending and taxation serve other purposes as well. These purposes are more generally political in nature. The nature of spending, and the nature of taxation determines the nature of goods and services produced by society, and also how the wealth is distributed.”

In spirit you’re right, but not exactly. Taxes don’t have the same effect on all products. The extent with which taxes influence behavior (a.k.a. what goods and services are supplied and demanded by consumers) depends on demand elasticity. While a politician says he’s taxing cigarettes to discourage their consumption, he knows this does not do so due to the fact that demand for the product is relatively inelastic (and if he doesn’t know by now, and with all the evidence that says so, he’s beyond help). Therefore you have a political purpose and a more “practical” revenue purpose (although we know that this is void when talking about the federal government).

You are more correct on spending, but that’s obvious. Politicians determine what we spend money on.

“Now, the deficit hawks want the deficit to be cut. In their view, this can be done by reducing government outlays, and/or increasing government revenues. What combination to employ is the current political soccer being played in DC — almost every politician seems to have bought into the deficit reduction is good paradigm.””

Okay, but…..

“Going down each of the two paths advocated by the deficit hawks leads me to the following conclusions.

1) If we reduce government spending, private sector income is directly reduced. This results in a reduction in income for everybody – even those that have no direct income from the government. The effect is more for some people, and less for other people, but everybody’s pocket book is impacted.”

This is what I’m talking about with respect to “nonsense.” Income does not equal savings; a portion of income equals savings.

Think of the economy as a big store owned and ran by the government. the goal of the store is to have all products bought. Whatever isn’t bought by the private sector the government has to buy back. It creates money to do this.

If the deficit is reduced, the private sector can accommodate this change by increasing spending. Notice that no one’s income is affected. What IS affected, however, is how much money is left over after all the private sector spending. That is savings, and that’s why government “deficits” = private savings. Government spending enables the private sector to save in direct proportion.

“2) We increase tax revenues. This results in a reduction of the money in circulation, and this also reduces the income for everybody — whether or not you were directly taxed. Thus the effect of the taxation is felt by everybody — more for some and less for others.”

As a matter of theoretical understanding, and going back to your “political” point, I see no way this will happen. The Teapublicans have taken it off the table, which is the sole reason why DC hasn’t come to an agreement yet. Theoretically, it’s also unnecessary. So while you have a point that it does reduce income, I don’t see why you felt the need to make this point (not to mention the fact that you put the word “or” between taxes and spending in your original comment).

“To this logic, the deficit hawks say, we have to bite the bullet in the short term to avoid problems in the future — inflation, and even hyperinflation are mentioned. But there has been no sign of inflation. So that is a canard, and a bogeyman designed to scare people.”

Again: I’m not catching the logic here, but I do agree that this is all just a bunch of hokem.

“The other thing mentioned is that the government debt will have to be paid by are children and grand children. This comes from a deep misunderstanding on the part of the general public of what government debt is. In fact the fiction that the government “borrows” has to be done away with. This last point is made even more poignant by the circulation by these fear mongers of Pete Stark’s interview on you tube where Pete Stark talks of government debt being good.”

I agree.

“I hope that this clarifies my point of view, and apologize if my thoughts were unclear to you before.”

Ok, I get that deficit=savings. But what happens if the deficit increases to an amount greater than the desired amount of savings by the private sector? I would assume that at first it would increase aggregate demand until the economy reached full employment, and then…?

I have worked in the field of automation for 35 yrs. Only twice have I seen anyone layed Off as a result. Automation is expensive. Companies automate when they have the money or borrow the money because they see demand down the road and they want to increase production. In thirty five years I have seen unemployement go up and down without regard to the dramatic increase in automation since 1977.

I do not expect to see full employment. In fact, I almost put the phrase in quotes. Another question: when I studied economics 40 years ago, I was taught that “full employment” meant an unemployment rate of about 4-5% that was deemed “structural” unemployment, and was generally considered irreducible. Is that still the case, and is this relevant to MMT?

It still is the case and is what MMT strives for. That said, I have to clarify. Though I agree with much of what MMT says, and have had endless conversations with Warren Mosler and Randy Wray, there are areas in which MMT and Monetary Sovereignty differ — particularly with regard to inflation.

So while I tend to defend MMT, I’m not totally on board with MMT, thus the name: Monetary Sovereignty.

I have now. I didn’t understand it. Filled with straw men, gobble-de-gook and false assumptions. No one assumes GDP is a perfect analogy for economic growth, but it’s better than what he recommends. (Oops, he doesn’t recommend; he only criticizes.)

The GDP formula he criticizes is merely a description of how GDP is calculated. It is not action-based as he claims. That is if you multiply one of the factors, you won’t necessarily get a corresponding change in GDP, because that multiplication will affect the other factors.

He mentions the one sure sign of phony economics: “Wealth.” No one agrees on what it is; no one can measure it; no one knows how much there is or was or will be. It’s the most subjective of “measures,” in a science that already has too much subjective bulls–t.

I know of no MMT advocate who wishes to merge with Austrian economics, a complete anethema to MMT.

Finally, he quotes Mises, who either is too stupid for me or too smart for me, because I don’t understand his mystical prattle.

Agreed. Automation less often causes firing, and more often reduces new hiring. Today’s unemployment was not caused by automation, but because of automation, it will be more difficult to cure.

So, the government has to prepare for that. Try to look 100+ years in the future, and it may be that virtually no one has a job. The computers will create the computers that create the machines that do the work.

In our transition from a human-labor society to a machine-labor society, changes in federal financing must be made.

I’ve been pondering this for the last week or so. If no one has a job and robots create robots and if a robot breaks down another robot will fix it, couldn’t the government just send everyone checks for ~$70,000 annually and the country would function just fine. This makes me think that increases in productivity are deflationary and require continuously lower taxes even to the point of negative taxes as outlined above with 100% automated economy.

So in a way we are victims of our own success with the productivity gains(but only because our leaders are inept). I’m certainly no expert on macro-economics but is my logic correct?

Deflation is an increase in the value of money compared with the values of goods and services.

The value of money is based on supply vs demand. What is there about the scenario you describe that would reduce the supply of money or increase the demand for money? Or conversely, increase the supply of goods and services or reduce the demand for goods and services?

Demand for money is based on risk vs reward. What is there about the scenario you describe that would reduce the risk (inflation) or increase the reward (interest)?

In any event, continuously lower taxes, even to the point of negative taxes, is a Monetary Sovereignty recommendation for all but high-inflation times. No need to wait for everyone to be unemployed.

Yes, there are several definitions of “saving” As I recall, Scott Fullwiler termed it “Private” Sector Surplus.” Or “net saving.” There even is confusion about the “Private Sector.” Functionally, the states, counties and cities are the same as people and businesses. All are monetarily non-sovereign. So one could make the point that federal deficits = all-other-sectors saving.

The fundamental information for my readers, now that Congress and the rest of the nation agree the deficit must be cut, is that private saving (however you term it) will go down when federal deficits go down.